Abstract

Background
The lack of access to formal risk management mechanisms for the
majority of the world’s smallholders means that households are forced to
self-insure (i.e. draw down on savings or assets to meet consumption
needs in the event of a catastrophe) against catastrophic events such as
drought. Informal risk management methods, however, often diminish the
productivity of agricultural activities, and provide only limited
coverage.

Index-based micro-insurance overcomes many of the challenges faced by
crop insurance programmes by delinking indemnification from individual
production. Although subject to its own limitations, such as basis risk,
index insurance may provide less-costly and more-transparent risk
management than other alternative products, enabling farmers to make
more-productive investments and better manage consumption risk.

Methods
We conducted a systematic search of published and unpublished material
relevant to take-up and impact of index-based micro-insurance. The
search was based on a programme theory outlining the causal channels of
interest, which was used to create a list of search strings and the
criteria for including studies in the review.

A coding tool, based on the EPPI-Reviewer platform, characterising
studies and collecting information on context, mechanisms and outcomes,
was used to collect information from the included studies. The review
methodology is influenced by the realist approach to synthetic analysis,
and only includes high-quality studies presenting new evidence on
take-up or impact of index-based micro-insurance products.

Results
Keeping in mind the limitations of generalizing from just thirteen
studies, our synthesis nonetheless identifies some notable patterns. In
terms of take-up, higher liquidity and income levels available to the
household were found to be positively associated with take-up. A lower
level of income diversification appears positively associated with
insurance demand.

Financial literacy is positively correlated with interest in weather
insurance. Familiarity and trust in the external agent or organisation
selling the insurance product as well as trust in the insurance product
elicited by information from, or decisions by, personal networks are
also associated with higher levels of take-up. Surprisingly, higher
levels of risk aversion are associated with lower demand for index-based
micro-insurance.

We also find mixed evidence of the impact of insurance cover on input
usage. Farmers offered a bundled loan and insurance products were found
to be less likely to accept the loan to finance hybrid seeds. In another
study, insurance coverage is associated with greater purchases of
fertiliser, where heterogeneous effects revealed that this effect was
larger for smallholders who had used fertiliser in the past and
portrayed better understanding of the insurance product. In addition, it
was found that having to pay for the insurance product, rather than it
being offered for free, increased the impact on fertiliser purchases.

Conclusions
The review shows that several non-price factors, including financial
literacy, trust and liquidity, appear to affect demand for index-based
micro-insurance products and that there is some, although mixed,
evidence that access to index-based insurance increases the use of
agricultural inputs, such as fertiliser.

In terms of research implications, the review has revealed substantial
evidence gaps in the literature on take-up and impact of index-based
micro-insurance. Little is known about issues such as the level and
impact of basis risk, financial literacy, consumer education and the
possibility of group-based index insurance. Future research needs to
focus on these important areas to gain in order for a more complete
understanding of the relevance of index-based insurance as a policy
solution. The field is in urgent need of evaluations analysing take-up
and, more importantly, impact of marketed index-based micro-insurance
products.